Calling the federal funds target rate “unusually low,” Federal Reserve Bank of St. Louis president James Bullard said it will need to go up “over time.”
“A key concern is that the current level of the federal funds target rate, at 2%, is well below the current rate of overall inflation,” Bullard said in a speech at Middle Tennessee State University Friday, according to prepared text released by the Fed. “This means that the real cost of borrowing short-term is negative. In other words, the FOMC’s interest rate target is unusually low. Over time we will need to adjust this rate to a level that is more conducive to long-run price stability and maximum sustainable employment.”
Bullard said near-term growth and inflation are “above all uncertain,” and depend on stabilization of the housing and financial markets.
“Financial market turmoil has recently been severe, and the consequences of this turmoil on real economic performance entail clear downside risk,” he said. “If financial market turmoil can be contained, the FOMC can turn attention to achieving better inflation results than those recently experienced. Until inflation clearly moderates, my colleagues and I will need to be especially watchful that our accommodative policy stance does not begin to worsen the outlook for long-run price stability.”